depreciation fix ??

[schirallicpa]

I've been asking way too many questions lately which is a reflection of the kind of crappy returns I'm doing this summer.

Client's previous tax preparer depreciated rental real estate over 16 years. PIS 06/2019.  These are fairly high dollar property so accumulated is very overstated.  If I fix this now, do I keep the accumulated and roll on?  or do I go back and amend 2019, 2020, and 2021?  Or do I make a huge add-back in 2022?  Which will not fly with the bank people who will not understand.  

I know you-all are going to tell me to amend......

(You-all:  not really southern, but occasionally talk to someone from the south.)

 

 

[Lion EA]

Because the depreciation has been taken for over two tax seasons,  you do NOT amend. You will use Form 3115 to calculate/report the correct depreciation and make the 481a adjustment on the current return.

 

[Lee B]

This is a classic case for the filing of a Form 3115 and a 481(a) adjustment.

Since the 481 (a) adjustment will be positive, your client can choose to spread the increased income over the next 4 years.

 

[schirallicpa]

ooohhhhhhh........

how do I elect over 4 years.

And - There is actually another item on the 2021 return that was reported wrong so I do still need to amend 2021 I think.  So I'm not sure how that effects the form 3115/481 situation.

Also - Form 3115/481/4years will totally blow the minds of the local small town bankers.....

 

 

[Lee B]

"A net positive IRC 481(a) adjustment increases income and is often referred to as a "government-favorable" adjustment. A net negative IRC 481(a) adjustment decreases income and may be referred to as a "taxpayer-favorable" adjustment. When a taxpayer uses the voluntary method change procedures or a regulation provision, it generally takes a net negative IRC 481(a) adjustment into account in the year of change. A taxpayer generally takes a net positive IRC 481(a) adjustment into account over four years (year of change and next three taxable years). See also IRM 4.11.6.6.4.1. When a taxpayer under examination requests consent for a voluntary change under Rev. Proc. 2015-13 or successors, it takes a net positive IRC 481(a) adjustment into account over two years, unless one of the following exceptions applies. See Rev. Proc. 2015-13, § 7.03(3)(b):"

 

The item that was reported in error on the 2021 tax return sounds like a separate issue which would be handled by an amended return.

[DANRVAN]

23 hours ago, schirallicpa said:

how do I elect over 4 years.

The default is 4 years for a "positive" adjustment.  There is an election to report it all in one year if not over $50,000.

[DANRVAN]

On 6/13/2023 at 1:11 PM, schirallicpa said:

Client's previous tax preparer depreciated rental real estate over 16 years.

How in the world did they come up with 16 years??!!

[Sara EA]

In the old days, before MACRS and possibly before ACRS, accountants could come up with any length of time they thought a piece of property would last, guess its scrap value, and depreciate based on that calculation.  These liberties ended with the adoption of the formal depreciation systems, yet over the course of my career I have encountered several older accountants who haven't kept up with their CPEs and continue to invent their own depreciation rules.